Is Edinburgh’s Restaurant Rental Bubble Set to Burst?

Concerned about the high costs faced by Edinburgh’s city centre restaurant sector, Pete Seymour outlines the dangers of landlords charging unsustainable rents and explains how this could be part of a more widespread malaise that threatens to upset the capital’s normally bouyant commercial property sector.

It started back when someone was asking for £90,000 for a 4,500 sq ft shell of a property just off the Royal Mile. It was a great location but the landlord was not even prepared to line the walls or provide flooring, heating and lighting. While there is a vibrant and very well respected restaurant scene in the city, there also exists a distinct lack of heritable restaurant owners out there. Indeed the vast majority of operators are trading under the restrictive boundaries of commercial leases.

Although fairly standard practice, the levels of rent – a fixed cost – can cripple a business if trading patterns change. Outside city centre locations it is our opinion that rent levels are determined by the trading potential of the site as a fair division of profit rather than turnover. As my father used to say, ‘Let the tenant prosper but not at the landlord’s expense’.

As a general rule, we normally apply 40- to-60% of profit as rent depending on condition of the subjects, their location, size, layout, ease of use, etc.

So how does this relate to a bubble in the property market? Well, these rents are normally agreed at the start of a relationship, when times are expected to be good, but they are nonetheless a fixed cost once agreed. Take Gaucho, for example, in Edinburgh’s St Andrew’s Square (pictured left). Their rent is reportedly around £330,000 per annum and their rates amount to a further £242,000. This means they have fixed costs – before paying for food and beverage, staff, light, heat, power, water, advertising and all the other standard business costs – of £452,452 per annum, or £8,701 per week. That means the first 200 customers a week are paying just for the rent and rates. Any experienced restaurant owner will know that this normally equates to less than 10% of the total running costs of the business. We are more than likely talking about a break even point of around 1,000 covers a week.

With Edinburgh’s famous attraction for tourists, this might not seem so hard a task. However, St Andrew’s Square has just announced another restaurant opening, and the new St James’s Centre will feature over 30 cafés, restaurants and bars. At some point there will be too many restaurants and so when trade levels drop, fixed costs will become very important. This concern has nothing to do with macro-economic factors, either; if discretionary spend goes down, then restaurants will be one of the first to suffer. Fingers crossed there is not a recession around the corner, although to be fair it’s been 10 years since the last one and since they are considered cyclical…

Gaucho are not the only unit on St Andrew’s Square paying north of £300,000. However, it would be prudent to consider the fact about to hit the market, not only in the St James Centre, but there is also a lot of discussion on Princes Street and the move of retail into leisure. Leisure is definitely one way to go but it can not be the golden bullet to fix all the high street’s issues.

Pete Seymour is Head of Licensed Trade and Leisure Agency at Graham & Sibbald. Their team of specialist chartered surveyors are currently working on a market analysis of the Scottish licensed trade market, to be released this April. Keep an eye out here at CateringScotland.com or email licensed@g-s.co.uk to receive your copy.